Saturday, June 30, 2012

Global Economic Slowdown May Worsen Significantly

Slowing growth as well as deficit and debt problems in the Eurozone, U.S., China and the emerging nations increases the odds of a deflationary global recession and a renewed down leg in the ongoing secular bear market.

The U.S economy has been slowing in the last two or three months. Either downside surprises or actual declines have been reported in key economic indicators relating to consumer spending, new orders, production and employment. A number of major companies have either revised down their second quarter earnings estimates or reduced their guidance for the second half. As a result, second quarter earnings estimates for the S&P 500 have been declining and full-year estimates probably will drop as well. When we further consider the dysfunction in Congress, the "fiscal cliff", the prospective end of operation twist, the elections and the prospect of renewed fighting over the debt ceiling, the threats to an already fragile recovery are high.

The Chinese economy is slowing, perhaps by more than the official numbers show. The NY Times has reported that many local and provincial officials have been falsifying numbers to hide the true extent of the problems. China’s economic model is heavily dependent on capital investments and exports, while internal consumer spending remains a relatively small part of GDP. Although Chinese officials recognize the need to increase consumer spending as a percentage of GDP, that is a long-term solution. In the meantime, exports to Europe, China’s top customer, are falling now and cannot be offset, except by ordering the building of more plants that will produce goods for which there is no current market. All in all, it seems that it will be difficult to avoid a hard landing.

The slowdown in Europe, the U.S. and China is also impacting the economies of the emerging nations, which are heavily dependent on exports. Declining growth is also driving down commodity prices. Despite all of the talk of decoupling, it seems apparent that the economies of all nations are linked and that there is little prospect of an oasis of prosperity in an increasingly dependent world. _Global Slowdown Will Accelerate

It is interesting to note that Friday’s EURUSD rally (1.8 percent) was the largest since exactly October 27. For reference, that previous rally was sparked by the Greek debt deal which arguably extinguished an immediate crisis fire; and yet the market still pulled an immediate about-face and tumbled 1500 pips in less than three months. That doesn’t mean that the euro is destined for the same fate this go around, but the fundamental comparisons between the current situation and October are remarkable. And, if anything, they are worse now. _Professionals are Skeptical of Euro Bandaid Bailouts

The so-called SOEs boast close family and financial ties to China's ruling party clique. Power and wealth have become one in the same—a kleptocracy of insiders skimming off part of the prodigious money flows sluicing through the Chinese economy through relatives strategically placed in state companies, consulting firms, and various financial institutions.
Unless this blatant favoritism is curbed by the incoming administration of Xi Jinping, says Overholt, China faces the prospect of long-term stagnation—a prospect potentially far worse than that of Japan some 20 years ago. _China Corruption Casts Shadow on Future Prospects

It is unlikely that the US will be in a good position to help stabilise the global situation, at least in the near future. US President Obama's war against the private sector economy of his own country guarantees that the US economic juggernaut will take time to rebuild, before it can take on many challenges outside its own immediate realms of influence.